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An institutional economics approach to agribusiness in development : South African case studies

Karaan, Abolus Salam Mohammad (2006-04)

Thesis (PhDAgric) -- Stellenbosch University, 2006.

Thesis

ENGLISH ABSTRACT: This dissertation is a sojourn into institutional economics and its application to
contemporary economic and development issues in South Africa. Economic
development initiatives in agribusiness have much to gain from the theories and
approaches advanced by the new institutional economics. Institutions are considered
essential to the functioning of economies, markets and organizations, despite its
neglect in neoclassical economics The study intends to prove that 'institutions matter',
especially when social and economic transformation is necessary. The cases studied
exhibit how institutions matter and shape economic outcomes.
The theoretical basis established in this thesis was applied to economic development
challenges such as contracting, organizational innovation, economic empowerment,
land reform, building social capital, organizational design, supply chain management,
entrepreneurial development, and modes of constructive engagement. The thesis is a
compilation of academic papers applied to the various selected developmental
challenges prevalent in South African agriculture.
The study begins by delving into the more popular New Institutional Economics
literature and specifically transaction cost economics. Somewhat unexpectedly, this
leads to a greater appreciation for the insights generated by the Old Institutionalists in
investigating the nature of institutions. Hence, the old institutional economics gains
prominence in the latter part of this work, contrary to contemporary approaches
followed in agricultural economics. The acknowledgement given to aspects like social
capital and embeddedness is consistent with Williamson's proposed framework for
the economics of institutions and this is used as the conceptual framework in this
thesis.
Whereas the new institutional economics was found to be useful in yielding
knowledge through analysis and remediable outcomes, the old institutional economics
retains its advantage in promoting understanding of problems especially in the face of
complexity. This inclination has influenced the thesis in two ways. First, it diverted
the latter part of the work towards the old institutional economics and the role of
social capital in shaping institutions and economic behaviour. Second, it reverts to theories on the nature of the firm that complements the transaction cost approach. The
transaction costs approach is thus only used where it is found most effective i.e.
analysing vertical integration between firms and the relevant ex ante incentives and
the ex post governance aspects
Most studies are motivated by a general recognition of the role of institutions in
framing economic outcomes and end up in the new institutional economics and
subsequently transactions cost economics. This favouring of the transaction cost
approach has found appeal due to its ability to predict structural and organisational
outcomes such as the efficient boundaries of firms, internal organisation, contractual
relations, incentives, etc. Methodologically, it enables analysts to employ the
empirical and mathematical rigour that has become a feature, but too often the
purpose, of economic research. Three papers are devoted to this approach and elicit
organisational designs that best contend with identified transaction costs.
The study confirms that several aspects matter in institutional analysis when applied
in an economic developmental context such as South Africa. Historical context is
acknowledged as a critical facet of institutional analyses in the sense that institutions
are shaped by the forces of history. Social capital is established as an important
component of institutional economic analysis and particularly relevant in situations
where social capital has been eroded by political economic manipulations. Attending
to social capital require (inter alia) insight into the nature of the societal context,
implied path dependency, the extent of trust, enforcement mechanisms, and agency
relations. Three of the papers attend to these aspects.

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